QLACs—What You Need To Know

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I love getting feedback from people on this column, good, bad or indifferent. As a professional in the financial industry, I am in the trenches every day and I believe certain threads of information are critical, but it is good to hear what is important to you. Feedback from this column helps me gauge the financial concerns of folks like you, to understand what is keeping you up at night.

After my article on longevity annuities last week, I got many requests for additional information on them, so I thought it would be a good idea to spend some more time talking about how to combat that paralyzing retirement risk—running out of money.

As you know, life expectancy is rising right along with the cost of living, which means your money needs to stretch further and further, quite possibly beyond what you had originally planned for. The solution to mitigate this longevity risk used to be Social Security. But today Social Security accounts for only about 38 percent of a retiree's income, due in part to the Cost of Living Adjustment being kept so artificially low.

With this becoming an increasing problem over the past decade, economic experts have racked their brains for a way to combat this, but sometimes new problems have old solutions. That old solution has people turning back to the insurance companies, with a recent press release from the US Treasury Department citing deferred income annuities as an important option to protect against longevity risks.

After recognizing a possible solution, the next step was to make that solution a more attractive option, which is where the new special tax rules for Qualified Longevity Annuity Contracts (QLACs) come into play.

Yes, I know, another acronym, but this is a good one to remember. QLACs were briefly discussed in last week's column. They are longevity annuities designed so that the money paid into one from a retirement account is not included in the calculation of Required Minimum Distributions at age 70 1/2. In fact, the money in a QLAC need not be used to calculate an RMD until as late as age 85 in some cases.

To delve deeper into the specifics of QLACs, I must throw another acronym at you, which is ROP, or Return on Premium. The ROP feature of a QLAC can be a lifesaver, or in more accurate terms, an estate planning saver. Generally, a major risk in longevity annuities is that if the owner dies earlier than expected, the money not already paid out is lost to the insurance company. With an ROP option on a QLAC, you can purchase a rider (there is always a cost for security), which allows you to pass on any remaining premium that has not been paid out to you to your heirs. The ROP will result in slightly lower payments throughout your life, but it can protect that remaining sum of money from being swept away if something unexpected were to happen.

Another feature of a QLAC is the ability to extend payments over the lifetime of a spouse if the QLAC owner dies first. A QLAC will give you the assurance that your spouse will still receive an income after you pass.

In addition to the features mentioned above that are specific to QLACs, longevity annuities in general are becoming more popular because people are looking for financial security. With the current market uncertainty, retirees are looking for safe, secure income in retirement. QLACs are a contract with an insurance company. When you purchase a contract, the insurance company is agreeing to pay you a specified amount of money each month. The insurance company can take your payment and do what they want with it, and invest it where they see fit, but the performance of those investments are all on the insurance company. You won't lose a cent of your principal due to market downturns.

With that security comes certainty—certainty in a regular, monthly paycheck that can supplement the Social Security checks received each month. Certainty in the amount of the payment received each month, certainty that the payment will remain consistent despite interest rates and market volatility and certainty that those payments will be received for life, no matter how many years that may be.

Now, Qualified Longevity Annuity Contracts should not make up a majority of your portfolio. And they were not created to supply endless wealth for decades. They were created to protect and secure a portion of a retirement account by allowing RMDs on that portion to be deferred until later in life when you need them; more and more people are beginning to see the value in that.

Folks, it does get tricky out there. So, when you look to build a retirement system, make sure you seek solutions from a qualified retirement specialist. It can make all the difference in your retirement world. Have a great week!

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